Disability Insurance – Do You Have Enough?
After sorting through an employer’s health insurance, life insurance, retirement, and other offered benefits, many employees only glance over their disability insurance coverage. It’s understandable. Like other insurance plans, there are confusing jargon and unfamiliar terms—not to mention it requires imagining some worst-case scenarios involving illness or freak accidents. However, with a little explanation and some helpful, easy-to-grasp numbers, it should become clear if you need to shop for additional disability coverage.
Disability insurance helps replace a portion of your income should an illness or injury prevent you from working. But what are the chances of something like that happening to you? That’s a number you can calculate, and it’s called your Personal Disability Quotient (PDQ). A PDQ takes into account a person’s gender, age, occupation, lifestyle, and some general health information to determine the chance they could become too seriously injured or ill to work for an extended period of time. Another way to think of your PDQ is your chance of not being able to earn an adequate income.
You can visit the Council for Disability Awareness’s PDQ calculator at WhatsMyPDQ.org for an estimation of your PDQ. It will also include the odds for how long your inability to work may last: three months, a year, five years, or more. Knowing your PDQ will help you decide if purchasing additional insurance coverage is a good idea—the higher your PDQ score, the more likely a medical reason could put you out of work.
Your PDQ affects another key number: your EIQ or Earnable Income Quotient. This is the income you expect to earn over the course of your career, based on your current salary, expected increases or raises, and projected age of retirement. You can think of your EIQ as the amount of money you need to be able to earn to maintain your lifestyle, and the mount you need to protect with disability insurance.
Most employers offer some disability coverage, with most group long-term disability (GLT) replacing 60% of a worker’s base salary up to a determined monthly maximum. Bonus income and commission income are not usually included in that 60%. Ask one of your HR representatives to review the policy with you so you understand if there is a gap between what the company will pay out and your EIQ. If there is a gap, that’s a good indicator you should look into individual disability coverage.
While Social Security disability might be an option should an employer’s coverage fall short, it’s more difficult to qualify for and only pays out an average of 40% of a person’s income, with the allowance rate for initial claims as low as 30% in some parts of the U.S.
When trying to understand the gap between your current coverage and being able to pay all of your bills should an injury occur, you’ll need to understand the two types of disability insurance: short-term and long-term.
Short-term disability may begin as soon as an employee is unable to work, but usually starts a week after being out of work. It can provide benefits for anywhere from a few weeks up to a year. This type of coverage is also called “sick leave.” Some states require companies to offer a minimum level of short-term benefits.
Long-term disability starts three to six months after a disability and could provide benefits for a few years up to retirement. The shorter the benefit period, the lower the premium. Some long-term plans have what’s called “portability,” allowing you to keep the coverage if you leave your employer.
Both types of policies have an elimination period, the time from when a sickness or injury occurs to when benefits begin. Before you buy additional long-term disability, understand the elimination period for your short-term disability—you don’t want to pay higher premiums for a shorter long-term elimination period of one month if your short-term coverage lasts for six months!
The ideal mix of group disability and an individual policy, of short-term and long-term policies, gives you the maximum income replacement during a claim.
Tips when shopping for individual disability coverage:
- Get quotes from multiple providers through an insurance agent, a fee-only financial advisor, or local brokers.
- See if your home, auto, or life insurance provider also offers disability insurance and ask for a discount if you bundle policies.
- Look for coverage that’s at least equal to 60% of your current income before taxes (approximately what you’re taking home after taxes).
- Aim for a policy that continues coverage until age 65.
- Double check the policy can’t be cancelled, called a “non-can,” and renewal is guaranteed at the same premium.
- Make sure the policy’s payouts aren’t limited to accidents. More claims are made due to chronic or severe illness, so make sure this is included in your policy.
- Ask if riders can be added to the policy in the future, such a rider for cost-of-living adjustments or a future purchase option to increase coverage as your income increases, without taking an additional physical.
- Make sure the policy is labeled “own-occ,” meaning coverage begins when you can’t do your specific job. An “any-occ” policy is based on you being unable to do any work considering your training, education, and experience.
- Look for an insurance company with a A++ rating by A.M. Best or Standard & Poor’s Global Rating.